Market Economics | Interest Rate Strategy - BNP PARIBAS ...

EMU Debt Monitor: CDS Analysis
Chart 1: Non-core basis diff vs. Gy: 1-week richening
Chart 2: 2y CDS basis diff vs. Germany: ATS expensive
80
5Y CDS basis
30
2Y CDS basis
60
40
cash cheap vs CDS
20
cash cheap vs CDS
20
10
0
-20
0
-40
-60
-10
-80
-100
-120
cash expensive vs CDS
Jul-10 Aug-10 Sep-10 Sep-10 Oct-10 Nov-10 Nov-10 Dec-10 Jan-11
BEL SPA ITA POR
Among non-core, the cheapness of 5y BTPs and to some
extent Bonos vs. CDS has changed little. Both 6-month
rolling z scores are over 2.00. As stressed last week, 5y
BTPs were trading too cheap within the BTP curve and also
vs. CDS. Although Italian CDS and BTP spread declined
30bp in a week, 5y BTPs are still too cheap vs. 2y and 10y
BTPs (see Chart 3). We expect 5y BTP to recover vs. CDS
in coming weeks but this time with wider spreads (see Trade
Ideas section).
-20
cash expensive vs CDS
-30
Jul-10 Aug-10 Sep-10 Sep-10 Oct-10 Nov-10 Nov-10 Dec-10 Jan-11
FRA FIN AUS NETH
Among core, while the Belgium/France 5y CDS is back at
the cash level, French paper continues to trade with a high
premium to DSLs compared to the CDS differential, even
though that premium narrowed on a lower French CDS. The
reduction of that premium can be played on the cash through
wider BTAN/DSL spreads on July 14. Regarding Austria, 2y
cash vs. France is now far too rich compared to the flat CDS
(see chart above and Chart 8).
Source: BNP Paribas
CDS Table & Stats
5y FIN NETH FRA AUS BEL ITA SPA POR IRE GRE
CDS 37 53 97 97 190 190 280 465 625 890
cash -36 -35 -18 -12 74 96 173 308 457 714
Basis 73.6 88.8 115.6 109.3 116.4 93.6 106.9 156.9 167.6 175.8
Box vs Gy 34.3 19.2 -7.7 -1.3 -8.5 14.3 1.0 -48.9 -59.7 -67.8
Average 26.8 11.9 -11.1 -2.9 -16.4 -21.8 -25.0 -34.1 -16.5 -75.8
Max 42.4 20.0 0.9 15.8 4.3 14.4 2.4 36.1 50.6 3.9
Min 15.7 5.0 -24.2 -23.3 -45.4 -59.8 -52.5 -117.7 -93.1 -165.2
Z score** 1.14 2.05 0.70 0.25 0.72 2.44 2.30 -0.35 -1.13 0.20
Current CDS vs Germany Change to 31/12/2009 Change to 30/6
2y 5y 10y 2y 5y 10y 2y 5y 10y
FIN 24 37 48 24 35 46 34 20 20
NETH 36 53 63 28 48 58 22 30 35
FRA 71 97 113 66 93 108 23 45 60
AUS 65 97 107 27 38 45 -9 -15 -17
BEL 155 190 187 133 162 152 35 67 66
ITA 135 190 190 89 116 111 -65 -26 -41
SPA 232 280 278 178 188 181 -77 -43 -17
POR 463 465 414 407 391 334 52 84 20
IRE 670 625 560 552 488 423 287 199 117
GRE 915 890 796 711 630 532 -253 -198 -252
Source: BNP Paribas
** z score measures the deviation from 6-mth rolling average CDS/cash basis of the country versus Germany, expressed in numbers of standard deviations. A
number above 1.50 means that the cash is trading historically cheap compared to its average basis level.
Eric Oynoyan / Ioannis Sokos 20 January 2011
Market Mover, Non-Objective Research Section
43
www.GlobalMarkets.bnpparibas.com